Monday, October 06, 2014

Aiming for flexibility, Forest City Enterprises buys out Arizona Retirement System, 75% equity partner in stalled B2 tower, seemingly at a discount

In a news release, Forest City Enterprises today announced it had bought out the interest of its 75% equity partner, the Arizona State Retirement System (ASRS), in B2 BKLYN, the stalled modular tower, seemingly at a discount.

Forest City paid $40.5 million for the ASRS share, which represents 75% of the value of the building. The cost of the tower was supposed to be $116,875,078, so 75% would be valued at $87.6 million. 

The ASRS surely hadn't invested that entire sum, which includes payments on debt, so the $40.5 million may come closer to the what the ASRS invested. But it may be that the ASRS is hedging its bets, aiming to limit losses rather than gaining the profits it once expected.

"The buyout of ASRS's equity interest to date, for which Forest City paid $40.5 million, removes B2 BKLYN from the $400 million residential development fund between ASRS and Forest City," the company said. Forest City also assumed ASRS's share of the debt on B2 (about $92 million), which is currently the subject of some negotiation, given that the lender stopped disbursements because construction stalled.

Last month, I noted that the ASRS, a potential loser regarding B2, and suggested that it remained in question whether the state agency did appropriate due diligence regarding the untested--and now highly-contested--modular process.

(The Greenland Group, the Chinese investor in the rest of Atlantic Yards, except for the arena, was not mentioned by Forest City, but it's not unlikely they get involved in a later stage.)

The announcement

"We felt it was prudent to make this incremental investment now, rather than cloud the future of the fund as a result of litigation related to a single property," said David J. LaRue, Forest City president and chief executive officer. "In addition, because this investment makes Forest City the 100 percent equity owner of B2, we will have greater flexibility as we drive to restart work at the building site and the modular factory, and to get the hundreds of affected men and women back to work.

Forest City and ASRS have formed a $400 million residential development fund, and continue on other buildings.

"Our relationship with ASRS continues to be very strong, and both organizations remain bullish on the Brooklyn market," LaRue stated. "Together, Forest City and ASRS continue to move the fund forward with additional multifamily opportunities in core markets around the country."

Of course we don't know exactly what happened in the negotiation between Forest City and ASRS. The whole point of setting up the fund was to share risks, so this is a reversal--though it's said to be a prudent one--for Forest City.

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